SES bruised but not broken

By Chris Forrester

August 24, 2015

On July 24th, SES issued its half-year numbers, and the market didn’t much care for what it heard. In the process of adjusting expectations for 2016, SES managed to wipe off many millions from its market capitalisation, and spook the satellite sector in general.

A month down the line and some analysts are beginning to think maybe there was something of an over-reaction. One such is Berenberg Bank, which in a 14-page report to clients on August 19th said the market saw the (again) delayed launch of one of its satellites (Astra 2G) as less bad news, and because of the retention of funds due on the launch might even help boost Earnings Per Share!

Indeed, the note states: “In our view, while disappointing the market, the downgrade is not proof that the SES business model is broken, or more vulnerable to competition. Rather, we see a small segment of the company as being more commoditised than we had previously thought. However, with this having already shrunk by circa 20 per cent, the exposure is now smaller, and limited to around 4-5 per cent of group revenues.”

“Delays to the launch of Astra 2G and SES-9 (and indeed any other satellite) cannot be predicted or controlled by management. Clearly, it would be preferable if SES’s guidance allowed for some slippage in the launch schedule, but with some satellites where there is a high level of pre-contracted business, i.e., the satellite starts life with substantial revenue generation from day one, the impact on growth is considerable. The other point, of course, is that a delayed launch should not have a negative impact on the value of the satellite programme, and in turn, should not affect the value of the company.”

The bank also reminds investors that SES is going through something of a transition period, and moving away from a “build it and they will come” model. CEO Karim Michel Sabbagh, says the bank, “will focus on customised capacity designed with specific long-term customers in mind – the kind of customers that pay a premium for this type of capacity. SES has substantial contracts of this higher-quality nature (on satellites yet to launch) and the more-commoditised business has shrunk by circa 20 per cent, on our estimates. It is, therefore, clear that SES’s portfolio will be skewed towards higher-quality business going forward.”

Not helping matters overall are the problems that SES is suffering with in-orbit failures or technical headaches, now much more than AMC-16. “This time,” says the bank, “issues affected NSS-6, which provides capacity primarily for the video market in India. We believe that this particular satellite is saturated, meaning that the capacity lost represented a loss of current revenue, rather than of future revenue had empty transponders been sold.”

However, the list of problems on in-orbit capacity seems to grow far too quickly, and now includes AMC-4, AMC-8, AMC-10, AMC-15, the already mentioned AMC-16 and now NSS-6, all of which were built on Lockheed Martin’s A2100 bus. Presented like this one has to wonder who was assembling these satellites! The bank reminds us that SES is no longer ordering new satellites from L-M. Thankfully, management is well on its way to replacing this damaged capacity.

Berenberg anticipates SES taking a larger slice of O3b sooner than later, and even this current year, and remains impressed with O3b steady growth (34 customers and rising, and up from 25 in June).

The not unattractive bottom line for the bank is a price target on SES stock of €34.50, which is less than previous from Berenberg but still rated a “BUY” by the bank.